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Friday, July 31, 2015

Russian leaders talk of a pivot to Asia and a strategic partnership with China partly to frighten the West. But behind the warm rhetoric, many Russians worry about China dominating their bilateral relationship, and China worries that Russia’s confrontation with the West will get out of hand. What China wants from Russia is an open road to Europe; but that is not part of Russia’s plan.The Russian authorities like to claim that they have a lot in common with China: both emerging economic powers, both permanent members of the UN Security Council, but above all both non-Western and perhaps even anti-Western powers. A recent report by the influential and well-connected Russian International Affairs Council argues that “the bond between Moscow and Beijing…will serve as basis for creating a ‘non-American’ world”. As Russia’s relationship with the West has deteriorated as a result of the conflict in Ukraine, Russian officials have talked more about a Russian ‘pivot to Asia’.Economically, the countries are a good fit: China imports raw materials and exports finished goods; Russia mostly exports raw materials (especially oil and gas, which made up over 70 per cent of its exports in 2013) and imports finished goods (Chart 1 and 2). The Chinese economy dwarfs the Russian, however: $10.3 trillion versus $1.8 trillion in 2014.

Chart 1:

Chart 2:

After the West imposed sanctions on Russia last year, Russia had a stronger incentive to develop its economic ties with China quickly. The 30-year gas deal, signed when Putin and Xi met in Shanghai in May 2014, had been under negotiation for more than ten years. The difference now was that Russia wanted to show the West that it could sell its gas to China instead; and China seized the opportunity to bargain for much more advantageous terms. Since then, Russia has edged closer to selling advanced Su-35 combat aircraft to China (after on-off talks lasting almost two decades); previously it had been wary of selling modern weapons systems to a country it viewed as a potential adversary.

In addition, Xi and Putin agreed a joint declaration in May 2015 on harmonising the development of the Russian-dominated Eurasian Economic Union (EEU) and China’s Silk Road Economic Belt, an ambitious infrastructure programme to develop a variety of transport and trade links from Western China via Russia and Central Asia to Europe. Chinese experts say that the leadership knows that the Silk Road Economic Belt cannot succeed without Russian acquiescence, given Moscow’s continued influence in Central Asia. Before the Ukraine crisis, Russia’s attitude to China’s plans was frosty, but now the Kremlin’s priority is to keep China friendly; so the Russian side proposed linking the Silk Road Economic Belt and the EEU – a proposal which China welcomed (even if neither side can yet explain what it would mean to link two such different projects).

Despite the strengthening of ties between them, however, China and Russia are unlikely to end up ruling the world together, for a number of reasons. First, their economic ties are not developing as well as Putin likes to claim. While trade between Russia and China grew rapidly in 2009-2011, it has since levelled off. What is more, the EU remains a more important trade partner for both Russia and China than they are for each other (Chart 3). In 2013, the EU accounted for 42 per cent of Russia’s total trade, and China for only 16 per cent. The EU was China’s largest trading partner that year (and still is); Russia was tenth. The EEU, with its high external tariff barriers, is intended to protect Russian industry rather than facilitate trade with others; and for the moment at least, the EEU is not working on a free trade agreement with China.

Despite strengthening ties between them, #China & #Russia are unlikely to end up ruling the world.

Even if trade between Russia and China grows dramatically, it is unlikely to match the trade either has with Europe. And in fact, trade between Russia and China, after rising slightly in 2014, is shrinking sharply as a result of the economic slow-down in both countries and the fall in oil and gas prices. In April 2015 (according to Chinese customs statistics) the value of Chinese exports to Russia was down 35.6 per cent, year on year; imports from Russia were down 30.1 per cent by value (as a result of falling hydrocarbon prices – volumes of oil and gas imports rose). The IMF forecasts GDP growth in China of 6.8 per cent this year and 6.3 per cent in 2016 (compared with 7.4 per cent in 2014) and a contraction in Russia of 3.4 per cent this year followed by growth of only 0.2 per cent in 2016 (after growth of 0.6 per cent last year); this suggests that a rapid increase in trade is unlikely to resume soon. A further sign that things are not going according to Putin's plan is the news this month that signature of a deal for China to buy gas from Western Siberia (by the so-called Altai route) has been postponed, apparently because the Chinese think that Russia is demanding too high a price for building the pipeline required.

Chart 3:Second, actual and potential bilateral irritants limit the closeness of the Sino-Russian partnership. Among the actual irritants are Russia’s sales of arms to China’s regional rivals, India and especially Vietnam. The sale of six Kilo class submarines to Vietnam is particularly provocative at a time of high tension between Hanoi and Beijing in the South China Sea.Among the potential irritants is history: Chinese nationalists have not forgotten that in the mid-19th century Russia took more territory than any other country from China, under so-called ‘unequal treaties’. While the Chinese authorities have not themselves raised the issue publicly, Beijing has allowed nationalists to let off steam about it on social media, according to a recent article by Igor Denisov of the Moscow State Institute for International Relations (which is subordinate to the Russian foreign ministry). As long as the political and economic relationship is good, it seems unlikely that the Chinese authorities will let nationalist hostility go any further; but they have shown in dealing with Japan that if necessary they can exploit nationalist feelings as a way of applying political pressure at any time. On the other side, Russia’s attitude to Chinese investment is deeply ambivalent: the Russian government is enthusiastic about China building a high-speed rail link between Moscow and Kazan, but not about the possibility of Beijing controlling a railway from China to Europe which would cross Russian borders. Chinese investment across their shared border is particularly sensitive. Despite a total lack of evidence, Russian nationalists regularly raise the spectre of Chinese settlers taking over the depopulated, mineral-rich regions of Siberia and the Russian Far East.Third, and most important, the two countries are conscious of their differing development trajectories. Russia knows that it cannot compete with China’s growing power and influence, even in the former Soviet Union. For Russia, ‘convergence’ between the EEU and the Silk Road Economic Belt is a tactic born of weakness, designed to delay China’s takeover of Central Asia, and to retain some Russian leverage. Moscow knows that China is investing far more in developing Central Asia than Russia can. For China, connecting the two projects is a matter of managing Russia’s fears. It allows Beijing gradually to work around the protectionism of the EEU and build the infrastructure it wants in Russia’s neighbourhood without provoking confrontation with Moscow.

Beyond any bilateral tensions, Russia and China also differ in their approaches to international problems. Though it can certainly be assertive, particularly with its neighbours, China is generally more cautious and less confrontational than Russia. Chinese officials and academics punctuate conversations on relations with the West with assurances that China seeks win-win outcomes; in private, they contrast this with Russia’s zero-sum approach to its relations with the US and Europe.

Chinese experts are very clear that they do not want to get dragged into a confrontation with the West by Russia, and least of all over Ukraine (a country in which China has a significant economic stake). While China is no more enthusiastic than Russia about the Ukrainian revolution, it did not support the annexation of Crimea and attaches great importance to the principle of territorial integrity: if Crimeans had the right to ‘vote’ to leave Ukraine, what would that imply for Tibetans or Taiwanese? Despite current tensions between China and the US over the South and East China Seas, Beijing is very conscious that a good economic relationship with the US is more important to China’s development than access to Russian gas is. Moreover, China has no quarrel with the EU; if anything, it is keen to strengthen economic and political ties with Europe – as seen at the EU-China summit on June 29th.

The priority for the Chinese is the success of Xi Jinping’s flagship project: the ‘One Belt, One Road’ initiative. This combines the Silk Road Economic Belt and the so-called ‘Maritime Silk Road’, and is designed to improve land and sea connections between Europe and China. The Chinese have been enthusiastically promoting the initiative in Europe. At the recent EU-China Summit the two sides agreed to support synergies between the European Commission’s ‘Investment Programme for Europe’ and the Chinese initiative. The details have yet to be worked out; the mandarins of Beijing and Brussels might struggle to agree rules on public procurement (for instance). But faster transit times between the EU and China would be good for exporters in both; and improved transport links should increase investment opportunities in the countries along the route for European as well as Chinese companies – unless Russia tries to exclude outsiders.In the end, Russia and China want very different things out of their relationship. Russia wants an alternative to Europe; China wants a road to Europe. So however ardently Russia embraces China, a real alliance will remain a hallucination: Beijing is likely to make use of Moscow's ardour but not fully reciprocate it.

Ian Bond is director of foreign policy at the Centre for European Reform.